ammo: Arm Against the Keynesian Counter-Revolution

A generation ago Keynesian economics was dead and buried, abandoned even by the most influential Keynesian economist of them all, John Hicks. It had been killed by the re-discovery of Hayek (by Robert Lucas , Alex Leijonhufvud, and John Hicks, among others), by Milton Friedman — and by stagflation. Keynesian economics was rejected by the great political figures of the time. By Thatcher and Reagan who looked to Hayek, not Keynes. And by the leaders of the states of the former Russian Empire, by the Chinese, and across the European continent, who again looked to Hayek (and Friedman), and not Keynes.

But today the free market and the ideas of Friedrich Hayek are under massive assault. The Keynesians are again in the saddle, riding the whipping horses of “crisis”, “deflation” and “stimulus” to the largest takeover of the free economy in the nation’s history.

How did this happen?

Let’s go back to the collapse of Keynes. In the wider world, Keynesianism was in disrepute, but in the universities, the tenured clerisy remained — a guild of modern day astrologers wedded to the ancient and failed cargo cult pseud-science of “Keynesian macroeconomics”. But all was not perfectly well, even in the commanding heights of the Ivory Tower. The economists, somewhat uncomfortably, taught an IS-LM version of Keynesian economics to undergraduates which they laughed at in the graduate seminar room. In the graduate seminars they oohed and aahed instead at “New” versions of Keynesian economics, given “equilibrium” foundations inspired in the first instance by Hayek (via Lucas), but having little to do with genuine microeconomic foundations. Only problem? There existed an unending number of these models — incompatible in various ways, and so different from “Keynes” that many of them went by names other than “Keynesian economics”. But a new, naive, and politically polarized generation was coming on the scene, both in economics and in politics. And the new order of the day was old time Keynesian economics, with “stimulus” and “deflation” the watchwords of the age. First with George W. Bush [see links below], and Bush economists such as Greg Mankiw, Alan Greenspan, and Ben Bernanke. And now with the arrival to dominance of Paul Krugman, Timothy Geithner and Barack Obama, things have really gone over the cliff. A new age of Keynes is upon us.

Call it the Counter-Revolution of the Keynesian Pseudo-Science.

So the time is now for executives and college students and small business owners and journalists and the general public to intellectually arm up — and participate in the beating back of the Cargo Cult science of the new Keynesians.

Free markets are good, until they fail. And when that happens, the Keynesians arise, like the ghost of Banquo. There must be a middle grouond — something like “Don’t do harm” for the Keynesians, and “A lighthouse can be built from private funds” for the rest (this, inspired by Coase).